PROFESSIONAL ARTICLES FROM E-NEWS:
Five Essential Investment Strategies for Wealth Preservation-click here to download
Income Tax Challenges for Subcontractors 2024-25-click here to download
How Marketing Helps Retain and Attract New Talent-click here to download
UPDATE ON ASA’S LEGISLATIVE AGENDA:
A Response to the Tension Between The Right To Be Paid and The Right to Withhold
Construction contracts at all tiers are filled with conflicting terms. Notably, for subcontractors the most obvious one involves the Sub’s right to be paid and the GC’s right to withhold payments. The right to withhold can be a two-edged sword for Subs, especially when they are the ones doing the withholding from lower-tiered parties. But many more times than not, they are the ones being victimized by either overzealous or wrongful withholding. Consider a clause that requires a Sub to continue working even if it is not paid. Or consider a clause that requires a Sub to perform extra work, no matter how large the expanded scope, even if there is no agreement in place for payment for the extras. Some contracts would allow a GC to withhold a payment of say, $100,00 that is otherwise undisputed and due, if there is a $2,000 item in dispute.
While Subs can refuse to sign contracts with such onerous terms, such refusal would likely cause a dramatic loss of jobs/revenue if they did so. Therefore, Subs look to either the courts or the legislature for relief. Neither choice is certain or easy to achieve relief. Legislation offers the best solution because it will apply to all contracts covered by its terms; whereas, a decision by a trial judge or jury will only apply to the particular litigants.
Considering past tendencies of courts to honor the principle of “Freedom of Contract” where courts defer to the language used within the four corners of the contract, Subs have experienced disappointment and defeat when onerous contract terms are presented for interpretation and enforcement. There is a long line of cases saying that a court will not rewrite the terms of the contract previously agreed upon by two businesses (kinder/gentler terms may apply for individual consumers). One noteworthy exception in Missouri jurisprudence is a decision handed down by the Missouri Court of Appeals where it was called upon to decide whether the dreaded “Pay-if-Paid” clause would prevent a Sub from being paid when the GC had not been paid by the owner. The Missouri court declared that notwithstanding a strongly worded clause that would deny payment, the GC nevertheless had to pay its Sub because there was a requirement in the prime contract (incorporated into the subcontract) that required the GC to pay its Subs before it was entitled to be paid by the owner. The court held that when there are conflicting terms contained within a subcontract, then the conflict would be decided in favor of the Sub because the GC had the “burden of clear expression” due to its superior bargaining position vis-a-vis its subcontractor. Such decisions are rare.
Existing Statutory Law.
Historically, the legislature has provided a more friendly venue for reform and relief, although relief is difficult, not assured, costly, and time consuming that requires dedicated effort, energy, and money. In the past Subs have successfully achieved payment protection from the Missouri legislature. For example there is legislation currently on the books, some of which are the result of ASA’s legislative initiatives (as indicated below by italics), that have resulted in significant improvements in the law that
Allow for immediate payment of retainage if a bond is substituted;
Allow a Sub to enforce a mechanic’s lien even if there is a “Pay-if-Paid” clause;
Allow a remote supplier “at any tier” to enforce a payment bond claim on a public project;
Afford payment bond rights to Subs on projects intended for use by private entities where the real estate is owned by a governmental body;
Provide for the recovery of attorneys’ fees if suit is brought to recover past due payments; and
Provide specific terms/condition for payment by owners, GCs, and Subs on public works projects.
As helpful as these laws are, they are not enough to fully protect Subs and Suppliers from overreaching contract terms and conditions that are so often part of the day-to-day life of the Sub’s real world. Hence, your Chapter’s Advocacy Committee has crafted an ambitious legislative agenda.
ASA Legislative Agenda
ASA and its legislative partners, SITE and PDF, have crafted an ambitious legislative agenda. While there has been and will continue to be strong opposition, it should be noted that its proposals apply to all parties in the contract chain, not just Subs and GCs. In 2024, ASA crafted a “Bill of Rights” that addresses some of the major difficulties facing Subs and the entire industry. Unfortunately, the Bill did not get passed into law, as was the case for so many other Bills as a byproduct of the dysfunctional legislative session in 2024. However, a successful legislative agenda requires patience, time, effort, and money. Indeed, most legislation does not pass its first year; it takes time – 7 or 8 years is not unusual.
In 2025, ASA and its partners will again tenaciously pursue its agenda. Below are highlights of their proposed Bill:
~ If a dispute exists between, say a Subcontractor and a GC, the GC would not be allowed to withhold from the Subcontractor more than the amount in dispute. This will eliminate the ability to hold back $100,000 of retainage, when there is a punch list of only $10,000.
~ A Subcontractor should be able to suspend work if it is not being paid per contract terms even if the contract says that it cannot.
~ A clause requiring a Subcontractor to continue working if it is not being paid is void.
~ A clause requiring extra work to be performed before there is an agreement on payment is void.
~ A clause requiring a Subcontractor to waive rights it has to recover an amount in dispute as a condition to recover an undisputed amount is void. Thus, suppose that there is a dispute over a $3,000 change order, but no dispute over a $50,000 progress payment. The GC may not withhold the $50,000 progress payment as leverage to fight the change order dispute.
~ A GC may not take adverse action against a Subcontractor (e.g. terminate, backcharge, etc.) without first giving the Subcontractor a chance to cure the problem.
~ Pay-if-Paid clauses are void. The owner’s failure to pay the GC shall not be a defense to a Subcontractor’s claim against the GC.
In addition under the Bill, construction contracts shall require certain provision to be included in contracts, and if they are not specifically stated, they shall be deemed by operation of law to include the following:
~ The Owner has 40 days to pay the GC for properly performed work. (The 40-Day period represents a compromise with disbursing agents who claim they need 40 days to perform their tasks.)
~ If an Owner intends to withhold funds from the GC, the Owner must give written notice to the GC of its intent to do so. Such notice shall be given within 15 days of receipt of the invoice. Failure to give timely notice shall be deemed to be acceptance of the invoice, with the right to later allege some work was non-compliant.
~ If the Owner withholds funds from the GC, then the GC must within 7 days provide this information to Subcontractors who are affected and failure to do so shall be deemed to be acceptance of the Subcontractor’s invoice, subject to the right to later allege non-compliance.
~ A GC may not withhold more from its Subcontractor than the Owner withholds from the GC for the Subcontractor’s work.
~ With respect to subcontracts, the GC must pay the Subcontractor within 7 days of receipt of funds from the Owner for the Subcontractor’s work. Subcontractors, in turn, have 7 days to pay their sub-subcontractors and suppliers. These terms shall also be deemed to be in the subcontracts even if not expressly stated.
~ GCs are required to notify their subcontractors within 2 days that they have received payment from the Owner for the Subcontractor’s work.
~ If a GC is paid by the Owner for a Subcontractor’s work, but the GC does not intend to pay the Subcontractor, then the GC must return the sum to the Owner.
~ All rights and responsibilities applicable to upper tier contractors shall flow down to lower tier parties. In other words, the same rights and responsibilities that exist between a GC and it Subcontractors, shall likewise apply between Subcontractors and their sub-subcontractors and suppliers.
~ The terms do not apply to residential projects of 4 units or less.
~ The terms do not apply to public works projects, but they do apply to projects where the land is owed by the government, but will be used for non-governmental purposes.
Your Help Is Needed
This is an ambitious agenda. It will not be easy or quick, but based on a history of successfully championing successful Bills with its partners, ASA has learned that with perseverance, effort, and money victories can be won. However, help and support from members is critical.
What is particularly persuasive with legislators in Jefferson City is to hear from individuals (voters) who have been unfairly hurt. If you have an actual experience – that is, a “war story” – where you have been victimized or suffered by reason of unfair contract clauses, please share that story with members of your Advocacy Committee who will be able to cite to the legislators real life stories of hurt, rather than merely present theoretically possible examples of abuse. Legislators are humans who relate to real people.
By supporting your Advocacy Committee’s work you are helping yourself, as well as the entire construction industry.
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